This article was first published on Tax@Hand, and is reproduced on this blog with the authorization of its authors.
<pclass=”intro”>>The French Administrative Supreme Court overturned on 1 March 2023 an appeal court decision that had refused to grant the French parent company of a tax consolidated group the neutralization of a dividend add-back, which the taxpayer had requested based on the Steria decision issued by the Court of Justice of the European Union (CJEU, 2 September 2015, C-386/14, Groupe Steria). The appellate court had disregarded the cross-shareholding within the group and therefore had considered that the EU subsidiaries distributing the dividends had not fulfilled the minimum 95% threshold required to belong to such a group.
Under French law, dividends eligible for the participation exemption (parent-subsidiary) regime are tax exempt, with the exception of a 5% lump sum added back to the taxable result. For fiscal years open before 1 January 2016, this 5% add-back was neutralized (i.e., tax exempt) for dividends distributed within a tax consolidated group.
The French tax consolidation regime is available to companies that are at least 95% owned, directly or indirectly, by the parent company of the group (article 223 A of the French Tax Code). In case of indirect shareholding, the ownership percentage is computed by multiplying the successive holding rates in the ownership chain.
The indirect ownership can be based:
- Through entities that are themselves members of the tax consolidated group; or
- Through entities that would meet all the conditions to be members of the tax consolidated group if they were tax resident in France (the requirement that they be at least 95% owned, directly or indirectly, by the French parent company is crucial).
Thus, subsidiaries held through entities that are not at least 95% owned by the parent company are excluded from the scope of the tax consolidated group regime.
Facts of the case
The French parent company of a tax consolidated group received dividends from its German subsidiaries from 2011 to 2015. Considering that these two German subsidiaries would have met all requirements to be members of the tax consolidated group had they been French residents, the parent company requested the neutralization of the dividend add-back (5% under the law at the time) based on the Steria decision.
The shares of each German subsidiary were owned:
- In part, directly by the French parent company and indirectly through its wholly-owned Dutch subsidiary;
- In part, indirectly through the other German subsidiary (cross-shareholding); and
- By no minority shareholders.
The administrative court of appeal ruled that each German subsidiary was less than 95% owned by the French parent company after disregarding the cross-shareholding and therefore did not meet all the requirements to be members of the tax consolidated group.
Decision of the Administrative Supreme Court
The high court overturned the decision of the appeal court and ruled that the two German subsidiaries would have been eligible to be members of the tax consolidated group had they been tax resident in France. In a very pragmatic decision, the court considered that the ownership structure of the German subsidiaries, which included cross-shareholding, was in line with the French legislator’s intent.
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